At a time when China is leapfrogging India on the growth of multiplex screens, the ailing cinema industry is seeking a less irksome tax structure to facilitate its growth

Ajay Bijli, Chairman and MD, PVR. The country’s ‘multiplex man’, Bijli revolutionalised theatres for moviegoers. After acquiring peer Cinemax in 2012, his PVR is the largest film exhibition company in India

The level of expectations from the new government has risen to an all-time high. India Inc is setting different sets of agenda for the new prime minister—from a quick revival of economic growth to fixing inflation to bringing down interest rates and unemployment within a few months of taking over. However, one of the biggest issues is whether India will choose a strong and stable administration with a full majority or will we continue to have a coalition government that has to work with the support of various national and regional parties, thus having a serious impact on decision-making.

The new government will have to usher in a paradigm shift in thinking and remove the fear psychosis from the bureaucracy and private sector. We need a government that leads and coordinates effectively between various ministries and catalyses execution. It will also need to focus on dialogue with states, decentralisation of power to address Goods and Services Tax (GST) and Direct Taxes Code, land acquisition, mining and other important reforms.

And the Union Budget will be its first litmus test.

The new government will need to engage with industries to understand the key changes it needs to effect with immediacy to revive and kickstart the growth engine. For instance, the film and entertainment industry in India is in need of urgent reforms.

While India is the fifth-largest market in the world with box office collections of $1.6 billion, the overall year-on-year growth has been around 9 percent over the last five years, and has been largely driven by multiplexes. In comparison, China’s box office has leapfrogged to $3.6 billion in 2013, representing a year-on-year growth of 27.5 percent. China added approximately 5,000 new screens in 2013 as compared to negative screen addition in India. (It is estimated that 250 new multiplex screens were added but 400 single-screen cinemas shut down in 2013.)

The entertainment tax rates in India are the highest in the world. This acts as a major impediment to the growth of the exhibition industry. Rates are as high as 67 percent in Uttar Pradesh and 45 percent in Mumbai, the movie capital of the country. Consequently, a large portion of theatre ticket receipts go towards taxes instead of being channelled into development of quality exhibition facilities. As a result, most single-screen cinemas are in a dilapidated state because of poor and negative profits. It is imperative that the entertainment tax structure across the country is rationalised by bringing down the rates.

The draft paper on GST prepared by the existing government has already pointed out that entertainment tax will be subsumed as part of GST. The erstwhile GST committee had also indicated that the peak rate of tax on services should be 16 percent; this will now come under consideration for the new government. More than 120 countries across the world have applied taxation on purchase of tickets under the GST regime. A uniform tax structure will facilitate a common market for cinema infrastructure.

Image: Danish Siddiqui / Reuters

In 2013, 250 new multiplex screens were added, but 400 singlescreen cinemas shut down

This will not only help rationalise taxes on tickets, which theatres are currently forced to collect from consumers and pay to the government, it will also help avoid multiple points of taxation that the industry is subject to. Today, multiplexes are levied indirect taxes at multiple levels without an option to get offset against each other. For instance, most of the indirect costs such as rental, CAM (common area maintenance) and electricity charges are subject to service tax, a central government levy. However, revenues from the sale of tickets and food and beverages are subject to entertainment tax and VAT, which is a state government levy. The industry cannot take credit for the service tax paid against entertainment tax or for VAT paid on cinema tickets and food and beverages. The introduction of GST will remove this dual taxation making the operating economics more viable for the industry.

The government should also consider reforms providing tax holiday benefits for infrastructural development on setting up malls, shopping centres and multiplexes in tier-II and -III cities to incentivise the sector and boost growth and development of such cities.

Another problem being faced by the industry is that ticket-pricing in many cases is regulated by state governments. For example in Tamil Nadu, single-screen theatres are allowed to charge a maximum of Rs 50 per ticket, and multiplexes can charge up to Rs 120 per ticket depending on the facilities offered.

Appropriately pricing the tickets is important for multiplex operators to meet the large capital and operating expenditure required to build and operate a world-class, state-of-the-art facility. I also believe that in any free market, pricing should be determined by the forces of demand and supply, and not by regulation. There is no danger of over-pricing because if multiplexes end up charging more than what the market can pay, occupancies will drop; multiplexes will be compelled to lower prices to bring back their patrons thus ensuring this self-correcting mechanism always enables optimum pricing.

The government also needs to create a single-window clearance mechanism to encourage the faster rollout of new screens. On an average, a cinema theatre in India requires at least 30 licences to start operations and the period of acquiring these licences can be as long as three to six months.

I sincerely hope that when the new government takes charge, it will proactively engage with business leaders and industry associations and work towards resolving the various impediments hampering the growth agenda.

(This story appears in the 30 May, 2014 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

Mr Bijli,
Every trader wants tax on them to be reduced or abolished. A petrol pump owner wants VAT/ST to be abolished, an accountant wants service tax removed, an office goer wants income tax to be abolished. If the government were to do all those things, where would the revenue come to do anything? Considering the amount of leakage we have in India, if 1 rupee is to flow down to the poor, then a 125 must be pushed down. I see a simple economic problem. You have two choices either decrease spending or increase revenue. If you cannot decrease your spending, then increase your revenue. I fail to understand why are multiplexes so expensive? Why is it that the cost of having an international movie going experience feel like I went to Singapore to see a movie. A hundred rupees for popcorn that cost you 2 rupees to make!!!! Just unreal.

on May 21, 2014

Deepa Menon, Vice President- Corporate Social Responsibility At PVR

Thank you for your comment and we would appreciate, if you could spend some time understanding the economics of cinema business. A cinema ticket sold in India is subject to approx 30 percent entertainment tax. Markets like Mumbai and Maharashtra are subject to even higher tax rates of 45 percent. So on every Rs.100 ticket which is sold to the customer, Rs. 30 is deposited as tax with government. Of the residual Rs.70 which is left, 50 percent of the proceeds are shared with the film maker. A cinema is left with only 35 percent share on every cinema ticket sold, out of which it has to meet its entire fixed running costs including rentals, air-conditioning and common area maintenance charges of operating in malls, salary of staff, running and maintenance and other overheads and then the high capital investment which has been incurred on building a world class facility. Hence, it has no option but to increase ticket prices to meet this cost. Also, to update you the average ticket price charged by PVR across its cinema circuit spread over 41 cities is approx Rs.170/-
The tax rates in India are the highest in the world with most of other countries having average tax rate of 7%-12%. If the tax rates in India were to come down it would automatically translate to lower ticket prices for all consumers and further roll out of multiplexes in Tier 2 and Tier 3 markets in India. This is exactly the reason that all single screen cinemas in the country are also languishing with little monies to spend on upkeep and maintenance of the properties and fail to draw audience even at lower ticket prices.

on May 23, 2014

Amit

Well it was refreshing to note that someone actually cared to read to and reply to user comments. Thank you for your efforts to understand what a viewer would want. Ms Menon, I agree with your analysis of the situation that the government does charge you entertainment tax and the slab should be lowered, however it still does not make me like your attempts to sell me snacks at over 250 times (not percent, times) their value. What you are attempting to do is go for a high paying customer and milk them to the lat drop you can. A movie going experience for a family easily crosses Rs 1500. Now I agree that there are people who don\'t mind doing it every weekend but for most people I know it is an expense thats comes once every few months. While most people clamor about growing population and its ill effects, the same population actually means more market for everyone else. It does not matter to you move the prices up every 3 weeks, there will still be a market for you. But it is the same greed that is also pushing a lot of people to invest in a decent home theatre system and either wait a few months for the DVD or download prints off the internet. You could get your money selling lots of Maruti 800\'s or a few BMW\'s. I see you going for the BMW\'s.... I hope some entrepreneur notices that there is a BIG market for the 800 too.

on May 25, 2014

Sanjeev

Entertainment tax is a form of revenue to the government. Therefore one should not crib about it. How about reducing the prices of tickets? Or the obnoxiously priced eatables inside the cinema halls? Or the differential pricing of tickets over the weekends?

on May 20, 2014

Deepa Menon, Vice President- Corporate Social Responsibility At PVR.

Thank you of your comment and we would appreciate, if you could spend some time understanding the economics of cinema business. A cinema ticket sold in India is subject to approx 30 percent entertainment tax. Markets like Mumbai and Maharashtra are subject to even higher tax rates of 45 percent. So on every Rs.100 ticket which is sold to the customer, Rs.30 is deposited as tax with government. Of the residual Rs.70 which is left, 50 percent of the proceeds are shared with the film maker.
A cinema exhibitor is left with only 35 percent share on the price of every cinema ticket sold, out of which it has to meet its entire fixed running cost including rentals, air-conditioning and common area maintenance charges of operating in malls, salary of staff, running and maintenance and other overheads and then the high capital investment which has been incurred on building a world class facility. Hence, it has no option but to increase ticket prices to meet this cost. Also, to update you the average ticket price charged by PVR across its cinema circuit spread over 41 cities is approx.. Rs.170.
The tax rates in India are the highest in the world with most of other countries having average tax rate of 7%-12%. If the tax rates in India were to come down it would automatically translate into lower ticket prices for all consumers and further roll out of multiplexes in Tier 2 and Tier 3 markets in India. This is exactly the reason that all single screen cinemas in the country are also languishing with little monies to spend on upkeep and maintenance of the properties and fail to draw audience even at lower ticket prices.

on May 23, 2014

Sanjeev

Appreciate your response. But it still does not answer the questions.
You say the average cost of ticket pan India is Rs.170/-. But for me what matters is what is the ticket price in Bangalore. Average ticket price in Bangalore for a non kannada movie is about Rs.300 on weekends and for a Kannada movie, it is Rs.250/-. Will the average work for me then? No.
The utter greed of Multiplexes in not even allowing water bottles, forget about other eatables, to be carried inside is insane. And no Madam, there are no security issues here. I mean what can go wrong if I carry a bottle of water inside, I don\'t know.